SA’s budget reforms, what the real impact will be for South Africans

In recent months we have seen some confidence return to South Africa’s market and a mood of optimism in everyday life as we vision a new dawn under the leadership of President Cyril Ramaphosa. A dark cloud still looms overhead in the form of wasteful expenditure and struggling State Owned Entities (SOEs) that have emptied the coffers of South Africa and continue to require funding from the government to remain going concerns. Ultimately, this will need to be funded and a large part of this will need to come through taxes.

In releasing the budget in February this year, government took a brave step to increase the VAT rate, that will have far reaching consequences for both rich and poor. Although this has been positive from an investor perspective, is this something the consumer can afford along with other sin taxes including a newly released sugar tax?

Much has been said about the budget, but not much time has been spent in quantifying the impact on consumers at different income levels. In a society like South Africa with high disparities between rich and poor, income elasticity plays an important part where any increase in price has an almost immediate impact on buying behavior, with consumers especially at the lower levels switching to cheaper products of possibly inferior quality or stopping buying products from that category at all.

In analysing buying behaviour it is important to understand consumption patterns across different socio- economic levels, as this defers significantly. This is summarised below:

Source: ILO, C-GIDD, Canback Consulting

The marginalized population (Average Annual income below R26,000), making up more than 50% of SA society, spend about 35% of what they earn on food and beverages. Over 50% of their income is spent on basic goods. The graph above highlights the great disparity between rich and poor in buying behavior, driven by income levels and affordability.

In further analysing the impact of the budget, using Stats SA data for consumption expenditure, further breakdown through our analysis into the socio-economic classes we concluded that in percentage terms the average impact across all levels is about 5.6%. This is a further 40% increase to the impact of inflation (4%) data released for February 2018. The impact across socio-economic levels is highlighted in the table below:

Socio economic levels

Impact (%)

Inflation

Total impact

Upper and upper middle

2.1%

4.0%

6.1%

Middle

1.8%

5.8%

Lower middle

1.7%

5.7%

Lower

1.7%

5.7%

Marginalized

1.5%

5.5%

Source: Canback Consulting

The increases, at the lower end is less than the upper end mainly attributable to a larger consumption of basic foods with a portion of that being zero VAT rated and lower % of expenditure branded goods, including alcohol, tobacco and sugary drinks.

Although it seems the impacts are similar in percentage terms, we should keep in mind that a R55 increase to a consumer for every R1,000 spent for those spending more then 50% of their income on basic needs is far greater than a R 61 increase to a consumer on every R1,000 spent at the higher end where only 12% is attributable to food and beverages

Reducing the impact by removing the VAT impact makes for interesting reading. This is illustrated in the table below:

Socio economic levels

Impact (%)

Inflation

Total impact

Upper and upper middle

1.6%

4.0%

5.6%

Middle

1.4%

5.4%

Lower middle

1.3%

5.3%

Lower

1.2%

5.2%

Marginalized

1.0%

5.0%

Source: Canback Consulting

This will reduce the impact by about 10% of the total impact, or excluding an inflation increase it will reduce the impact on the consumer by one third (33%). This highlights its significance in the budget impact. Coupled with the recent price increase on fuel, with prices over time being passed on to consumers we can expect 2018 to be a tough year for the consumer, that would impact an already stuttering economy trying to get going again.

Lower to medium end consumers will struggle to absorb the latest budget and further increases may have dire consequences for them. South Africa can not afford any more slip ups and expect to pass on this cost to the consumers through budget increases.

For this to materialise policy changes is necessary. This includes a commitment to improving education at all levels and ensuring accessibility to grow the workforce, a firm commitment from government that it will not fund inefficiencies by acting as lender and guarantor of last resort to State owned Entities (SOEs), reducing the public sector wage bill with salaries for government employees at 35% of expenditure, , improving governance and fiscal discipline within the public sector and at SOEs, instituting reforms across SAs most important sectors to drive investment and transformation; and creating a business conducive environment within the private sector to ensure ease of doing business mainly for small to medium enterprises (SMEs).

The government’s inability to address these items in future will further impact confidence and the economy and drive up tax rates for consumers.